The illiquid Swedish corporate bond market creates opportunities for the High Yield Opportunity Fund

Finansinspektionen (FI) writes in yesterday's edition (June 9, 2021) of Dagens Industri a debate article entitled: The bond market must have higher liquidity.

FI refers to the corporate bond market and then highlights the problem of liquidity in the Swedish market. At the beginning of the pandemic, the selling pressure was strong and the secondary market could not absorb everything. As a result, bond prices fell sharply and several funds were forced to close for withdrawals because it was not possible to liquidate holdings to meet withdrawals.

In its article, FI states that the bond market has become important for financial stability in Sweden and proposes a number of measures to reform it. Fi also mentions the risks of funds having daily redemption rights investing in illiquid corporate bonds.

We share the view that the bond market and in particular the high-yield market is illiquid. For this reason, we created the High Yield Opportunity Fund (HYOP) in 2020.

HYOP is designed specifically to take advantage of the illiquid corporate bond market. HYOP is closed for withdrawals and reinvests all maturities during the first 3 years, after which funds are distributed back to investors during years 4 and 5. The investors who have to sell during the term can do so in the secondary market where ABG is the market maker.

HYOP will therefore not be forced to sell during periods of high volatility - on the contrary, HYOP can take advantage of these situations and act as a buyer.

HYOP can be long-term in its investment horizon and hold bonds to maturity. This means that we can aim to give a return of 7% +, which is much higher than similar open-end funds.

In a comment to FI's debate post, HYOP's manager Peder Broms says:

“This is a first step towards a more transparent reporting of liquidity risks associated with the bond market. The regulations and tools that FI advocates can contribute to increased understanding from investors in the corporate bond segment. We think it speaks for the strength of HYOP's structure ”

Read more about HYOP here - it is still possible to subscribe to the issue on 1 July.

Link to press release: Debate article in Dagens Industri 9/6: The bond market must have higher liquidity | Finansinspektionen

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